VAT uncertainties in securitisation in Thailand

Transfers of receivables raise questions

Value Added Tax (VAT) has been implemented in Thailand since 1992 as a means to collect tax on the added value of the goods and services at each level of consumption. You can collect VAT and issue the invoice only if you have registered with the Revenue Department. Otherwise there is a penalty of up to 200% of the VAT amount shown in the tax invoice plus a surcharge at the rate of 1.5% per month.

Question arise about the duty to issue a VAT invoice in cases where there is a transfer of rights to receive payments from a seller of goods or services to other parties. For example, if you enter into a construction contract with a contractor and he contractor transfers the right to receive payment from you to a transferee (e.g. a bank), you may wonder whether your contractor still has to issue the VAT invoice to you under the contract or whether his transferee has that obligation.

This could be a real concern, because if the VAT invoice is not issued by the right person it cannot be used for a VAT credit or refund, which could result in penalties and surcharges on you. You may believe the transferee should be the person issuing the invoice since he is the person who receives money from you, not the contractor anymore. But what about withholding tax obligation in case of services? Should you withhold 3% in the name of the contractor or in the name of the legitimate transferee?

One may question why the contractor has to transfer the right to receive payment. This may have to do with his financing, where the right is assigned to a lender as collateral or as a means of repayment of a loan. The assignment can be viewed as a securitisation transaction, which basically deals with the transfer of assets from one company to another (likely to be a special purpose vehicle or SPV) which will issue securities such as debentures or other forms of debt instruments for sale to investors.

With this type of arrangement, the originator can use its assets _ namely the rights to receive payments _ to raise funds from investors (acting through the SPV) for use at a low interest rate, in the belief that the assigned rights are better kept in the hands of the SPV if the originator becomes bankrupt. The structure has been widely used in the financial world for a long time. Prime Minister Thaksin Shinawatra is now trying to put securitisation in place for everything including the right of street vendors to sell goods on the sidewalk.

Any securitisation plan that follows the Thai Securities and Exchange Commission's regulations and is approved by the SEC can enjoy tax benefits i.e. VAT, Specific Business Tax (SBT) and stamp duty exemptions upon transfer of the rights from the originator to the SPV or from the SPV back to the originator. But sadly, even if the law waives VAT and SBT upon the transfer, there is a practical problem of whether the SPV can act as a party to collect VAT from customers (the debtors of the transferred claims) and to issue VAT invoices.

For example, a hire-purchase company sells its accounts receivable to an SPV at 100 while the outstanding amount is 130. When instalments under hire-purchase contracts become due and the SPV collects payments, it should collect VAT and issue tax invoices to the customers. But this is not the case, as the Revenue Department has told the originators, such as the transferrors of rights, to continue to collect VAT from customers and to issue tax invoices.

Here is the answer to the above withholding tax question: The same guideline applies to your case regardless of whether or not the transfer of rights takes place under SEC regulations. That is, as you are a payer of income, you will be held responsible for withholding tax on service fees payable to the transferee but in the name of the original contractor. Similarly, you are not allowed to use the VAT invoice issued by the transferee and it is essential that the contractor do so to ensure that your right to claim the tax credit or refund will not be affected.

There have been a number of rulings on transfers of receivables, stating that the buyers of receivables were not allowed to issue VAT invoices, as they were not contractual parties to the customers under the contracts. If you fail to follow this guideline, you will be subject to a penalty (up to 200%) plus surcharge (1.5% per month).

There is still no clear signal from the Revenue Department on how to solve this practical issue, especially in the case of an approved securitisation plan. It seems the department will not change its position easily, and an SPV is viewed as a financier that should be subject to specific business tax.

Even in the case where there was a transfer of receivables by a contractor pursuant to the execution of a court order, when the customers paid money to the official receiver pursuant to the order, the original contractor (whose rights to receive payments had been attached by the court order) still had the legal obligation to issue VAT invoices.

It is hard to imagine how the bankrupt original contractor could comply with the tax law in that situation _ unless the law empowered the official receiver to issue the tax invoice on behalf of the original contractor, similar to the sales of attached assets in a public auction.

The Revenue Department's position creates an awkward situation in practice and this is one of the reasons securitisation in Thailand is not very popular.

- Written by Piphob Veraphong, Thanasak Chanyapoon and Prangtip Anantavipat of LawAlliance Limited. They can be reached at: admin@lawalliance.co.th or 02-651-5490.